Greenbrier reports FY3Q results—and a few big changes

The Greenbrier Companies, Inc. on Tuesday, July 2 reported results for its fiscal year third quarter ended May 31, 2013, and at the same time announced significant changes in its wheel operations, and management of those operations.

Greenbrier said it is addressing margins and ROIC (return on invested capital) in its “underperforming” Wheels, Repair & Parts segment with management changes. Eight of 38 shop locations will be closed or sold, and initiatives have been launched to “significantly improve” performance at six locations. These actions are “expected to liberate $25 million of capital for this segment by Dec. 31, 2013,” the company said. “An additional $75 million of capital is expected to be liberated through working capital improvements of $25 million and refinements to the our leasing model of $50 million. We expect to achieve these capital efficiencies no later than Feb. 28, 2014.”

In Greenbrier’s fiscal year third quarter, net earnings, excluding a non-cash goodwill impairment charge, were $15.7 million, or $.50 per diluted share, on revenue of $433.7 million. A non-cash goodwill impairment charge of $71.8 million net of tax, or $2.60 per share, related to the Wheels, Repair & Parts segment, led to a net loss for the quarter of $56.0 million, or $2.10 per share. Adjusted EBITDA for the quarter was $39.6 million, or 9.1% of revenue. New railcar deliveries were 2,500 units.

Since Sept. 1, 2012, Greenbrier has received broadly-based orders for 13,500 railcar units valued at almost $1.3 billion, of which 1,400 units were received during the first quarter, 4,500 units during the second quarter, 5,500 units during the third quarter, and 2,100 units subsequent to the May 31, 2013 quarter end. The new railcar backlog as of May 31, 2013 was 14,200 units with an estimated value of $1.57 billion (average unit sale price of $111,000), compared to 11,700 units with an estimated value of $1.30 billion (average unit sales price of $111,000) as of Feb. 28, 2013. The company’s new, proprietary Multi-Max™ autorack car was launched in May.

“We are encouraged by the growth of our diverse backlog and robust order activity, with orders in the third quarter for 5,500 railcar units,” said Greenbrier President and CEO William A. Furman. “Since quarter end, we have received orders for an additional 2,100 railcar units, including a sizable doublestack intermodal order for 1,500 units, about a third of which will be delivered in fiscal 2013, and the balance in fiscal 2014. Approximately 37% of the total 7,600 units ordered since March 1, 2013 are for tank cars in North America, with the remainder of the orders in this time period consisting of a broad range of railcar types including various sizes of covered hoppers, automotive products, gondola cars, and doublestack intermodal cars. The automotive railcar market remains active and we are pleased by the enthusiastic customer response to our Multi-Max™. We anticipate brighter prospects for intermodal railcar activity and downstream energy-related railcar products such as plastics, in fiscal 2014.

“Company-wide, we are confident about our goals announced in April of improving gross margins by at least 200 basis points and liberating a minimum of $100 million of capital no later than Aug. 31, 2014. We are gaining traction on this $100 million goal and are now accelerating the timing of it to Feb. 28, 2014. In our Wheels, Repair & Parts segment, where we incurred a related $71.8 million (net of tax) goodwill impairment charge this quarter, we are taking decisive action with a focused effort to improve our performance both in the near term and over time. This action is expected to liberate $25 million of capital by Dec. 31, 2013 and improve gross margin and ROIC. The planned sale or closing of the eight underperforming facilities in this segment by the end of the calendar year will eliminate a drag of approximately 100 basis points on our segment gross margin and 30 basis points on our company-wide gross margin. While we are currently focused on operational execution, we also believe there are significant opportunities to streamline general and administrative costs. We will be taking initial steps to reduce these costs in the months ahead, and will announce specific reduction targets as part of our fourth quarter earnings release and 2014 outlook.

“I remain confident in the long term strength of our integrated business model,” Furman said. “A combination of factors however, including a slower than anticipated ramp up of tank car production at our GIMSA (Mexico) facility and near term softness in the intermodal market affected deliveries, revenue, and gross margin for the third quarter. A $1.9 million pre-tax charge, ($1.6 million net of tax, or $.05 per share) related to certain balance sheet adjustments at a wheels and repair location also adversely impacted results for the quarter. We are addressing these issues head-on and expect our new management team to quickly impact results.”

Greenbrier will sell or close eight of its 38 Wheels, Repair & Parts facilities, and is also implementing initiatives “to improve profitability and reduce capital employed at another six facilities that are currently underperforming.” In addition to anticipating a minimum return of capital of $25 million by year’s end, Greenbrier has appointed two new co-leaders for its Wheels, Repair & Parts segment effective with the June 30th retirement of Timothy A. Stuckey, 62, as president of Greenbrier Rail Services. Stuckey has served in various leadership roles in his 26-year career with Greenbrier, and has led the Wheels, Repair & Parts segment since 1999.

“We appreciate Tim’s dedication throughout his tenure with us,” said Furman. “Since joining Greenbrier in 1987, Tim has been integral to our organization in multiple key assignments. I appreciate Tim’s assistance with the new leaders of the Wheels, Repair & Parts segment as we enter a critical new phase for this business. Tim helped create our Wheels, Repair & Parts business and guided these operations from inception into a period of remarkable expansion. We thank him for his contributions to Greenbrier’s growth and diversification.”

Management of the Wheels, Repair & Parts segment will be co-led by William Glenn and Rick Turner. Both will report to Furman. Stuckey will remain with Greenbrier as a consultant for the next year “to aid the transition to new leadership and to assist with selected industry assignments.”

Glenn, who joined the company in 2007, will be responsible for the repair and parts operations in the Wheels, Repair & Parts segment. He will also continue to serve as Greenbrier’s Senior Vice President and Chief Commercial Officer, a position he has held since 2009, and maintain his responsibilities for Greenbrier Europe, the Company’s European manufacturing operations.

Turner rejoins Greenbrier as Senior Vice President, Wheels and Strategic Execution and will be responsible for wheels operations in the Wheels, Repair & Parts segment as well as strategic execution and operational oversight throughout the entire segment. Turner led Greenbrier’s wheels business from 2006- 2010, after Greenbrier’s acquisition of wheels provider Meridian Rail in 2006. Turner brings nearly two decades of operations experience in the transportation services industry to his current assignment, including extensive work in the wheels business since 1995.

“I am pleased to welcome Rick back to Greenbrier,” Furman said. “His leadership skills and broad range of experience in the wheels business will be a valuable resource for us as we execute our strategic initiatives and improve operational performance. I also appreciate that William will add management of repair and parts to his current responsibilities. Further alignment of repair and parts with our commercial team will allow us to more fully realize the intrinsic benefits of Greenbrier’s integrated business model. I fully expect that, collectively, Rick will utilize his strong operations background and William will rely on his commercial expertise in the railcar market to together identify synergistic opportunities in the freight railcar aftermarket.

“The eight facilities that will be sold or closed are either non-core or otherwise underperforming,” Furman said. “The six facilities that are identified for improvement will pursue margin enhancements through a combination of operational improvements and commercial initiatives including the negotiation of more balanced commercial terms with business partners. Additionally, these six operations, along with all facilities in the Wheels, Repair & Parts segment, will be expected to meet increased targets for ROIC. If the expected improvement at these six facilities does not occur, those operations not measuring up will also be sold or closed. We have completed an in-depth review of each location. The 14 facilities that have been identified for improvement, sale, or closure employ nearly 600 people, with annual revenue of about $105 million and capital employed of approximately $55 million.